Pricing Considerations Objectives and Approachesand Approaches of Marketing 11... · and Approachesand Approaches Ch t 11Chapter 11 ... Pi H M NPrice Has Many Names Rent Tuition Bribe

Pricing Considerations Pricing Considerations and Approachesand Approachesand Approachesand Approaches

Ch t 11Ch t 11Chapter 11Chapter 11

Objectives

Understand the internal factors Understand the internal factors affecting a firm’s pricing decisions.affecting a firm’s pricing decisions.g p gg p gUnderstand the external factors Understand the external factors affecting pricing decisionsaffecting pricing decisionsaffecting pricing decisions, affecting pricing decisions, including the impact of consumer including the impact of consumer perceptions of price and value.perceptions of price and value.Be able to contrast the threeBe able to contrast the threeBe able to contrast the three Be able to contrast the three general approaches to setting general approaches to setting

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prices.prices.

What is Price?What is Price?

P i H M NP i H M NPrice Has Many NamesPrice Has Many Names

RentRent TuitionTuition BribeBribeFeeFeeR tR t

FareFareT llT ll

SalarySalaryWWRateRate

CommissionCommissionTollTollPremiumPremium

WageWageInterestInterestCommissionCommission

AssessmentAssessmentPremiumPremiumRetainerRetainer

InterestInterestTaxTax

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DefinitionDefinition

PricePriceThe amount of money charged for The amount of money charged for a product or service, or the suma product or service, or the suma product or service, or the sum a product or service, or the sum of the values that consumers of the values that consumers

h f th b fith f th b fitexchange for the benefits exchange for the benefits of having or using the of having or using the g gg gproduct or service.product or service.

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What is Price?What is Price?

Price and the Marketing Mix:Price and the Marketing Mix:Only element to produce revenuesOnly element to produce revenuesMost flexible elementMost flexible elementMost flexible elementMost flexible elementCan be changed quicklyCan be changed quickly

Price Competition Price Competition C P i iC P i iCommon Pricing Common Pricing MistakesMistakes

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Fig re 11 1Figure 11-1:

Factors Affecting PriceFactors Affecting Price Decisionsec s o s

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Factors to Consider WhenFactors to Consider When Setting PriceSetting Price

Market positioning Market positioning influences strategyinfluences strategyOth i i bj tiOth i i bj ti

Internal FactorsInternal FactorsOther pricing objectives:Other pricing objectives:

SurvivalSurvivalCurrent profitCurrent profit

Marketing Marketing objectivesobjectives Current profit Current profit

maximizationmaximizationMarket share leadershipMarket share leadership

objectivesobjectivesMarketing mix Marketing mix

t t it t ipp

Product quality Product quality leadershipleadership

N tN t ff fit bj tifit bj ti

strategiesstrategiesCostsCosts

NotNot--forfor--profit objectives:profit objectives:Partial or full cost Partial or full cost recoveryrecovery

Organizational Organizational considerationsconsiderations

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recoveryrecoverySocial pricingSocial pricing

considerationsconsiderations

Product quality q yleadership:F SFour Seasons starts with very high quality service, then ,charges a price to matchto match.

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Factors to Consider WhenFactors to Consider When Setting PriceSetting Price

Pricing must be Pricing must be carefully coordinated carefully coordinated

ith th thith th thInternal FactorsInternal Factors

with the other with the other marketing mix marketing mix elementselements

Marketing Marketing objectivesobjectives elementselements

Target costing is often Target costing is often used to supportused to support

objectivesobjectivesMarketing mix Marketing mix

t t it t i used to support used to support product positioning product positioning strategies based on strategies based on

strategiesstrategiesCostsCosts gg

pricepriceNonprice positioning Nonprice positioning

Organizational Organizational considerationsconsiderations

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ggcan also be usedcan also be used

considerationsconsiderations

Swatch usedSwatch used target costing to manage costs carefully and create a watch offering the rightoffering the right blend of fashion and functions at aand functions at a price consumers

ldwould pay.

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Factors to Consider WhenFactors to Consider When Setting PriceSetting Price

Types of costs:Types of costs:VariableVariable

Internal FactorsInternal FactorsFixedFixedTotal costsTotal costs

Marketing Marketing objectivesobjectives

How costs vary at How costs vary at different production different production

objectivesobjectivesMarketing mix Marketing mix

t t it t ipp

levels will influence levels will influence priceprice--settingsetting

strategiesstrategiesCostsCosts

Experience (learning) Experience (learning) curve effects on pricecurve effects on price

Organizational Organizational considerationsconsiderations

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ppconsiderationsconsiderations

Fig re 11 2Figure 11-2:

Cost Per Unit at DifferentCost Per Unit at Different Production Levelsoduc o e e s

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Fig re 11 3Figure 11-3:

Cost Per Unit As a FunctionCost Per Unit As a Function of Accumulated Productiono ccu u a ed oduc o

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Factors to Consider WhenFactors to Consider When Setting PriceSetting Price

Who sets the price?Who sets the price?Small companies: CEO Small companies: CEO

Internal FactorsInternal Factorspp

or top managementor top managementLarge companies: Large companies: Di i i l d tDi i i l d t

Marketing Marketing objectivesobjectives Divisional or product Divisional or product

line managersline managersPrice negotiation isPrice negotiation is

objectivesobjectivesMarketing mix Marketing mix

t t it t i Price negotiation is Price negotiation is common in industrial common in industrial settingssettings

strategiesstrategiesCostsCosts settingssettings

Some industries have Some industries have pricing departmentspricing departments

Organizational Organizational considerationsconsiderations

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pricing departmentspricing departmentsconsiderationsconsiderations

External factors must also be External factors must also be id d h l iid d h l iconsidered when planning considered when planning pricing strategypricing strategy

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pricing strategy.pricing strategy.

Factors to Consider WhenFactors to Consider When Setting PriceSetting Price

Types of marketsTypes of marketsPure competitionPure competition

External FactorsExternal Factorspp

Monopolistic competitionMonopolistic competitionOligopolistic competitionOligopolistic competition

Nature of market Nature of market and demandand demand Pure monopolyPure monopoly

Consumer perceptions Consumer perceptions

and demandand demandCompetitors’ Competitors’

t it ip pp p

of price and valueof price and valuePricePrice--demanddemand

costs, prices, costs, prices, and offersand offers PricePrice demand demand

relationshiprelationshipDemand curveDemand curve

Other Other environmental environmental

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Price elasticity of demandPrice elasticity of demandelementselements

Fig re 11 4Figure 11-4:

Demand CurvesDemand Curves

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Demand curves sometimes slope upwardDemand curves sometimes slope upward—Gibson learned that its high-quality guitars didn’t sell as well at lower prices

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Factors to Consider WhenFactors to Consider When Setting PriceSetting Price

Consider competitors’ costs, Consider competitors’ costs, prices, and possible prices, and possible reactions when developing areactions when developing a

External FactorsExternal Factorsreactions when developing a reactions when developing a pricing strategy pricing strategy Pricing strategy influences Pricing strategy influences th t f titith t f titi

Nature of market Nature of market and demandand demand the nature of competitionthe nature of competition

LowLow--price lowprice low--margin margin strategies inhibit competitionstrategies inhibit competition

and demandand demandCompetitors’ Competitors’

t it ig pg p

HighHigh--price highprice high--margin margin strategies attract strategies attract competitioncompetition

costs, prices, costs, prices, and offersand offers

competitioncompetitionBenchmarking costs against Benchmarking costs against the competition is the competition is recommendedrecommended

Other Other environmental environmental

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recommendedrecommendedelementselements

PC marketingPC marketing has become extremely price competitive.

Knowledge of titicompetitive

prices, offers, and costs is key to pricing y p gstrategy.

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Factors to Consider WhenFactors to Consider When Setting PriceSetting Price

Economic conditionsEconomic conditionsAffect production costs Affect production costs External FactorsExternal FactorsAffect buyer perceptions Affect buyer perceptions of price and valueof price and value

Reseller reactions toReseller reactions toNature of market Nature of market and demandand demand Reseller reactions to Reseller reactions to

prices must be prices must be consideredconsidered

and demandand demandCompetitors’ Competitors’

t it i consideredconsideredGovernment may limit or Government may limit or restrict pricing optionsrestrict pricing options

costs, prices, costs, prices, and offersand offers est ct p c g opt o sest ct p c g opt o s

Social considerations Social considerations may be taken into may be taken into

Other Other environmental environmental

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yyaccountaccountelementselements

Fig re 11 5Figure 11-5:

Major ConsiderationsMajor Considerations in Setting PriceSe g ce

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General Pricing A hApproaches

CostCost--Based Pricing:Based Pricing: CostCost--Plus PricingPlus PricingCostCost Based Pricing: Based Pricing: CostCost Plus PricingPlus PricingAdding a standard markup to costAdding a standard markup to costIgnores demand and competitionIgnores demand and competitionIgnores demand and competitionIgnores demand and competitionPopular pricing technique because:Popular pricing technique because:

It simplifies the pricing processIt simplifies the pricing processPrice competition may be minimizedPrice competition may be minimizedIt is perceived as fairer to both buyers It is perceived as fairer to both buyers and sellersand sellers

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General Pricing A hApproaches

CostCost--Based Pricing ExampleBased Pricing ExampleCostCost--Based Pricing ExampleBased Pricing ExampleVariable costs: $20 Fixed costs: $ 500,000Variable costs: $20 Fixed costs: $ 500,000Variable costs: $20 Fixed costs: $ 500,000Variable costs: $20 Fixed costs: $ 500,000

Expected sales: 100,000 units Desired Sales Markup: 20%Expected sales: 100,000 units Desired Sales Markup: 20%

Variable Cost + Fixed Costs/Unit Sales = Unit CostVariable Cost + Fixed Costs/Unit Sales = Unit Cost$20 + $500,000/100,000 = $25 per unit$20 + $500,000/100,000 = $25 per unit

Unit Cost/(1 Unit Cost/(1 –– Desired Return on Sales) = Markup PriceDesired Return on Sales) = Markup Price$25 / (1$25 / (1 20) = $31 2520) = $31 25

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$25 / (1 $25 / (1 -- .20) = $31.25.20) = $31.25

General Pricing A hApproaches

CostCost--Based Pricing:Based Pricing: BreakBreak--EvenEvenCostCost Based Pricing: Based Pricing: BreakBreak Even Even Analysis and Target Profit PricingAnalysis and Target Profit Pricing

BreakBreak even charts show total cost and totaleven charts show total cost and totalBreakBreak--even charts show total cost and total even charts show total cost and total revenues at different levels of unit volume.revenues at different levels of unit volume.Th i t ti f th t t l d t t lTh i t ti f th t t l d t t lThe intersection of the total revenue and total The intersection of the total revenue and total cost curves is the breakcost curves is the break--even point.even point.C i i hi k fiC i i hi k fiCompanies wishing to make a profit must Companies wishing to make a profit must exceed the breakexceed the break--even unit volume.even unit volume.

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Fig re 11 6Figure 11-6:

Break-Even Chart forBreak Even Chart for Determining Target Pricee e g a ge ce

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Fig re 11 7Figure 11-7:

Cost-Based VersusCost Based Versus Value-Based Pricinga ue ased c g

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General Pricing A hApproaches

ValueValue--Based Pricing:Based Pricing:ValueValue Based Pricing:Based Pricing:Uses buyers’ perceptions of value rather Uses buyers’ perceptions of value rather than seller’s costs to set pricethan seller’s costs to set pricethan seller s costs to set price.than seller s costs to set price.Measuring perceived value can be difficult.Measuring perceived value can be difficult.C ttit d t d i d litC ttit d t d i d litConsumer attitudes toward price and quality Consumer attitudes toward price and quality have shifted during the last decade.have shifted during the last decade.

I d i f l i i fI d i f l i i fIntroduction of less expensive versions of Introduction of less expensive versions of established brands has become common.established brands has become common.

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Perceived value reflects more thanmore than just the functionalfunctional benefits of a

d tproduct.

The pen atThe pen at left costs $185 00$185.00

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General Pricing A hApproaches

ValueValue--Based Pricing:Based Pricing:ValueValue Based Pricing:Based Pricing:BusinessBusiness--toto--business firms business firms seek to retain pricing powerseek to retain pricing powerseek to retain pricing powerseek to retain pricing power

ValueValue--added strategies added strategies can helpcan helpcan helpcan help

Value pricing at the retail levelValue pricing at the retail levelEveryday low pricing (EDLP)Everyday low pricing (EDLP)Everyday low pricing (EDLP) Everyday low pricing (EDLP) vs. highvs. high--low pricinglow pricing

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General Pricing A hApproaches

CompetitionCompetition--Based Pricing:Based Pricing:CompetitionCompetition Based Pricing:Based Pricing:Also called goingAlso called going--rate pricingrate pricingMay price at the same level, above, May price at the same level, above, or below the competitionor below the competitionor below the competitionor below the competitionBidding for jobs is another variation Bidding for jobs is another variation of competitionof competition based pricingbased pricingof competitionof competition--based pricingbased pricing

Sealed bid pricingSealed bid pricing

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